How PLUS Loans Work

Direct PLUS Loans vs. FFEL PLUS Loans

Just to make the financial aid process a bit more confusing, there are two PLUS Loan programs. Both are federal loans, but one is handed out directly from the government and the other is serviced by a private lender.

The official name of the direct loan program is the William D. Ford Federal Direct Loan Program, but we'll just call it the Direct PLUS Loan Program. With this loan, you apply directly to the government and the government pays the funds directly to your school.

he other program is called the Federal Family Education Loan (FFEL) program and the loan itself is known as the FFELPLUS Loan. The major difference is that instead of applying to the government, parents apply to their choice of private lender. The private lender is the one who decides if the parent qualifies and the lender is the one that pays the school. These loans still carry a fixed interest rate and are federally guaranteed.

One major difference between the two loan types is their interest rates. Direct PLUS Loans have a fixed interest rate of 7.9 percent and FFEL loans have an interest rate of 8.5 percent. Another difference is that the FFEL PLUS Loan gives you a choice of lenders, while the Direct PLUS Loan does not.

There is some evidence that FFEL PLUS Loans are harder to qualify for than Direct PLUS Loans. The 2007-08 National Postsecondary Student Aid Study (NPSAS) revealed that 42 percent of FFEL PLUS applicants were denied loans and only 21 percent were denied under the Direct PLUS program. This is because the law allows private lenders to apply "more restrictive standards" [source: FinAid].

Depending on your school, you may not have a choice as to which loan program you apply. Some schools only participate in one program. As of March 2010, the U.S. Department of Education says that 46 percent of colleges accept the Direct PLUS Loan and 39 percent more are transitioning to the program [source: Liberto]. That's a major shift from 2008, when only a quarter of schools participated in the Direct PLUS program [source: FinAid]. Pending legislation could end the FFEL program altogether and bring all federal student loans under the Direct Loan program umbrella [source: Liberto].

Now let's look at the application process for both types of PLUS Loans.

When the Banks Default

In the darkest days of the 2008 credit freeze, many private educational lenders were having trouble borrowing enough cash to cover their student loan obligations. Since the federal government guarantees these loans, it swooped in and paid for 68 percent of FFEL loans in the 2008 fiscal year [source: FinAid].